Return to variance?

Banks and investors were hammered on short single-stock variance positions during the crisis, causing many dealers to pull back from the variance swap market altogether. Instead, some have been pushing volatility swaps as an alternative, but not everyone agrees this is the best course of action. Joel Clark reports

The phrase ‘return to simplicity’ has become something of a mantra in the over-the-counter derivatives industry over the past 20 months, but it may not remain that way for very long. Unprecedented market conditions certainly caused dealers to shy away from the complex financial engineering that had previously characterised derivatives, but the return of calmer markets is causing some practitioners to reassess the degree of simplicity they are willing to accept.

This is particularly evident in